Taxation is an important consideration in divorce and property settlements. Those in dissolution actions should seek specialized income tax advice for their specific settlements from their accountant or a tax attorney as taxation is a highly specialized area of the law. However, there are some general principals of which to be aware.
Property settlement transfers are typically not taxed upon dissolution if they occur within a reasonable amount of time from the divorce and are expressed in the dissolution decree. There can be some exceptions for spouses who are not citizens of the United States, just as there are with spousal inheritance in estate planning.Marital Residence
The marital home can be a couple's most substantial asset and can be the subject of differing views of disposition upon dissolution. There are generally three options with regards to the marital residence:
- One spouse transfers interest to the other
- The home is sold and proceeds distributed
- The home is retained, often by a spouse caring for the couple's children, and sold at a later time
If the home is transferred, there is no capital gain to the receiving spouse. If the home is sold, however, there may be a taxable gain. Some gain is excludable if the home was owned and used as a primary residence for two out of the past five years. If it was not, it is considered by the IRS to be an investment property, rather than a primary residence eligible for preferential tax treatment. Additionally, the taxpayer must not have sold a home within the past two years. This provision again focuses on home ownership as as aspect of personal, rather than investment use.Spousal Maintenance
Spousal maintenance was previously taxable to the payee spouse, however that has changed and is currently taxable to the payor spouse. This relatively recent taxation change has been addressed in Colorado's spousal maintenance guidelines, which are advisory only. Courts are free to deviate from the guidelines, however they were enacted to promote more uniformity in the award of spousal maintenance.Child Support
Child support is not included in the payee's gross income nor deductible by the payor. Previously tax law allowed for a dependency exemption generally allocated to the majority time parent. That has changed and now there is a higher standard deduction instead. The majority time parent can also claim a childcare credit for children under age 13 for work-related childcare.
A majority time parent can also claim a more favorable head of household status when filing taxes if meeting certain criteria:
- The taxpayer must not be married
- The taxpayer provides more than one half of the funding to maintain the household
- The taxpayer's child resides in his or her household for more than one half of the year
- The child living in the home qualifies as a dependent
Are you looking to turn change into a new opportunity? At Janko Law and Mediation, LLC we know how to obtain a solution that will turn change into opportunity. We are committed to pursuing settlement to preserve family relations to the maximum extent possible, however also zealously represent your interests in contested litigation if desired or necessary. Give us a call for a complimentary case assessment at 303-210-4204, or fill out our confidential online intake form.